Presently, there are very limited approaches for providing upfront liquidity (e.g., cash) to a borrower in exchange for a subsequent payment stream obligation. Typical approaches include loans that have fixed or variable rate interest ultimately related to other floating interest rates, such as LIBOR (London Inter-Bank Offer Rate), which is the rate banks usually charge each other for loans.
Using these approaches, a borrower receives liquidity in the form of a loan and commits to repaying the loan based on the interest rate. Since the interest rate, whether fixed or variable, has little or no relationship to the borrowers' fortunes, there is an inherent and unaccounted for risk that changes in the borrower's fortunes will lead to default, where the principal will never be completely repaid. This risk is particularly high when the borrower belongs to a class of borrowers in jeopardy of adverse economic changes, whether short or long term. Of course, this is a risk to the borrower as well. Therefore, a major component of this risk is the fact that the borrower's payment obligation is not particularly related to the fortunes of the borrower, e.g., the borrower's ability to generate revenue or income.
As has been shown by recent financial crises, general economic downturns can increase the strain on borrowers, and ultimately lead to defaults. Borrowers and lenders may each be relatively unprotected in such situations—using typical lending approaches. Borrowers gradually see their cash holdings and incomes decline with no systematic adjustments responsive to the new economic circumstances.
Systems and methods that enable borrowers to obtain liquidity with minimal risk to lenders, as well as diminished risk to borrowers, could provide substantial advantages over typical approaches to providing liquidity.